The Electric Commentary

Tuesday, January 30, 2007

The Social Security Toilet

The Coyote Blog adds some math to back up what we already knew:

This allowed me to answer a question: If I had been able to take these social security taxes and instead put them in a savings plan, and then took the accumulated balance out at age 67 and bought an annuity (at current rates), what would be my monthly payment? Well, assuming a very conservative after-tax rate of return of 5%, I would have $1,077,790 at age 67 to buy an annuity, which at current rates quoted on the Vanguard site, would give me $7,789 a month until I die. This return is just about four times the amount I get from having the Social Security Administration manage the money for me instead. Ugh. Also note that I did not assume "risky" equity investments or whatever straw man anti-reformers are using nowadays. If I assume a higher return of 8% (the stock market in the 90's returned something like 18%) then my annuity will be $17,860 per month, or 9 times the Social Security payout. Double ugh.

In fact, this all opens up the obvious question, what actual rate of return is Social Security paying out on your "premiums?" Well, in fact we can calculate this with the same spreadsheet. I plugged in 2% for the interest rate. No go -- resulting annuity is to high. Then I plugged in 1%. Still too high. Could the government be paying you 0% on your money? I plugged that in. Still too high. In fact, the implied rate of return on my money in the Social Security system is -0.8% a year. In other words, not only is the government not paying me any interest, they are charging me to hold my money.

Read this too.


  • Reading that makes me almost sick to my stomach. Especially the bit about Elliot Spitzer prosecuting private companies for providing vastly superior retirement programs. I knew social security was a terrible investment, but I had no idea it was this bad. I'm almost depressed over this.

    By Anonymous Anonymous, at 3:40 PM  

  • Is it an investment or an insurance program?

    By Anonymous Anonymous, at 3:51 PM  

  • For the guy that wrote it, it's 87% wellfare program and 13% really bad investment. It's certainly not an insurance program. Retiring isn't risky. It happens to almost all of us.

    By Blogger JesusIsJustAlrightWithMe, at 4:14 PM  

    Fed chief Bernanke errs in concluding that boomers soon
    to retire is the problem with social security. He told
    Congress that in 1983 the Social Security and Medicare
    trust funds were replenished by legislation but then the
    Congress borrowed the money from and left IOUs, leaving
    the funds now less than full as the law was intended.

    The clearcut answer is right there: replenish those funds
    with a new law which restricts the funds for the American
    people. Congress is made up of representatives of we,
    the people. They make no sense when to undo the law they
    created for us. Bernanke told them about 80 million more
    boomers will retire beginning in 2008, and the funds will
    be broke in ten to thirty years.

    A fund is not a fund if the funds are allowed to be used
    for other purposes. So, the Congress we elected created
    a law which made the funds solvent and then the same
    Congress broke the law which benefited us, the American
    people. I doubt they would want their own personal
    retirement funds to be treated the way they continue to
    treat the Social Security and Medicare funds of the American
    people. Our own representatives are robbing us of secure
    retirements and continue to tax us for a bogus fund. They
    are guilty of creating a Ponzi scheme of the worst dimensions.

    This is not rocket science, and does not need reduction
    of benefits nor increase of taxes. The answer is simple
    and not even Economics 101. Stop the talk and just do it:
    fund the funds and leave the money in The Social Security
    and Medicare Funds. Leave the funds alone for the
    American people.

    By Anonymous Anonymous, at 5:31 PM  

  • It's certainly not an insurance program. Retiring isn't risky. It happens to almost all of us.

    It is not meant to be a retirement plan, jijarwm.

    By Anonymous Anonymous, at 5:55 PM  

  • Semantics. I'll try again: Getting old isn't risky, it happens to almost all of us.*

    *I realize that some social security goes to disabled people. This is arguably insurance. However, disability benefits are a drop in the bucket compared to what is paid to your average 67+er.

    By Blogger JesusIsJustAlrightWithMe, at 6:09 PM  

  • Could you anonymous guys pick pseudonyms or something. It's hard to follow you. I'm guessing that the first comment is one person, the second and fifth comments belong to another person, and the forth comment is a third person (or perhaps a robot?). It's hard to follow with all these anonymous comments and it's so easy to just click on other and type a name, or one letter if you want.

    Social security is not an insurance program really. Everyone collects from it. There is no risk involved. It really is a ponzi scheme. Just another example of something that government forbids but takes part in itself, like running gambling operations, and stealing.

    By Blogger JesusIsJustAlrightWithMe, at 7:20 PM  

  • There is risk involved. If you die before you hit the right age, you don't get any. It is old age insurance.

    Also, although I would certainly not doubt that SS doesn't give a high return like private investment, Coyote seems to fail to account for the fact that Soc. Security payouts have traditionally (not guaranteed in the future) had cost of living increases each year. They aren't much, just 4.1% last year (I think last year). You aren't accruing that as interest, but this increase in payout will decrease the difference. Investments don't get cost of living increases.

    By Blogger Scott H, at 8:04 PM  

  • The "risk" of reaching 67 really high. So high that it can't be considered a risk for underwriting purposes. If we enter into an agreement to "share the risk" that some of us might reach 67, we wouldn't be "sharing the risk." We'd be passing the buck. And that's what we are doing.

    By Blogger JesusIsJustAlrightWithMe, at 9:23 PM  

  • If you make it into an "investment program" (which you can still do on your own, I might add) do you still want to finance an insurance "safety net" for the poor elderly, the children whose parents have died who currently benefit, and the disabled, as someone mentioned? If you know the history, this was never a private investment program.

    How are the returns on your auto insurance paying off lately? I don't know many who are hoping to collect exactly what they've paid in. Those folks are dangerous, actually, a claim waiting to happen. I agree the numbers need to be "fixed" (accounting for the higher lifespan, making it a more need-based system, leaving SocSec for Social Security alone); I don't think starting the argument where you are jijarwm -- arguing the investment v. insurance concept -- is helpful.

    -- 3+5

    By Anonymous Anonymous, at 7:55 AM  

  • Insurance doesn't pay "returns." Investments do. Insurance shares risk. I pay a premium so that in the unlikly event that I am in an accident, the insurance company takes my premium, and all the premiums paid by the people who didn't get in an accident, and pays for the damage caused by the accident. The premiums we pay are based on the liklyhood that one of the premium payors will get in an accident. Social security doesn't do this.

    An investment is when you give your money to someone else so that they can lend it to someone else and charge interest (a bank)and then pay you some of that interest later, or use it to try to increase their profit (the stock market) and then provide you with a return. You give money to someone so that you get money later. Social security does do this. Poorly.

    If social security truly was an insurance program, I would have no problem with it. Or less of a problem with it anyway. If it was a program designed to cover chlidren whose parents have died and the disabled (all risks that can be underwritten and shared) then I could support such a safety net. But getting old is not an insurable risk. Almost all of us get old. The vast majority of SS payments go to regular run-of-the-mill old people. To pay a premium (FICA) that is just divided amongst [almost] all of the payors is simply redistribution of wealth. Actually, to force workers to pay a premium that is redistributed amongst old people in exchange for a promise that the worker will be given money from later workers when he is old isn't even redistribution of wealth. It is a ponzi scheme.

    By Blogger JesusIsJustAlrightWithMe, at 10:12 AM  

  • Good point that most reach 67. People who live the longest get the most.

    Regardless of the paternal nature of it, it serves a social purpose: the specter of a significant number of the elderly being unable to pay to care for themselves is something the populace probably does not want to tolerate. Which will happen without some requirement of some kind because many people won't save enough.

    By Blogger Scott H, at 6:18 PM  

  • Some rquirement of some kind maybe... but I think the Coyote guy's point is that this requirement is retarded.

    By Blogger JesusIsJustAlrightWithMe, at 7:16 AM  

  • The really funny thing about Social Security for me is that the retirement age has gone up 2 years since 1937 and the average life expectancy has gone up 18 years.

    When SS was first implemented, the average life expectancy (61.7 years) was below the retirement age (65 years).

    Government inertia at its finest.

    By Anonymous Rashid Z. Muhammad, at 3:36 PM  

  • an additional sickening factor that's mostly excluded from what the guy is saying in that post, is the inherent risk in relenquishing your property (especially to the government). there's an X percent chance they won't give it back at all, where X is not vanishingly small.

    By Blogger ahren, at 10:51 AM  

  • Usually for an annual premium, an insurance company agrees to assume the risk associated with a client’s assets. This difficult, yet rewarding industry will probably maintain its current rapid growth.

    By Blogger king, at 11:38 PM  

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